After more than seven years of reforms, the Treasury last year merged three State-owned development finance institutions (DFIs) — Industrial and Commercial Development Corporation (ICDC), Tourism Finance Corporation (TFC) and Industrial Development Bank Capital Ltd — to form Kenya Development Corporation.
KDC interim director-general Christopher Huka spoke to the Business Daily on why the new entity has prioritised recovery of bad loans, some dating as far back as the 1960s.
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WHY WAS THE MERGER OF THESE THREE DFIS IMPORTANT?
The key objective for the merger was to create a single strong DFI that supports Kenya’s socio-economic growth. Our focus now is to catalyse the socio-economic growth of Kenya by creating alignments to the national development priorities.
Most of the DFIs that were there before had lost that alignment to the national development like the Big Four Agenda, the Vision 2030 and SDGs (the UN sustainable development goals).
The merger also gives us the opportunity to co-finance with other banks, which was not exploited so much before. We also want to be the key agency that will do government projects as far as on-lending is concerned because we have the capacity.
WHAT ARE SOME OF THE NEW STRUCTURES THAT YOU HAVE CREATED TO ACHIEVE YOUR GOALS?
We have a new department called resource mobilisation and partnerships. Our ambition with this new directorate is to open up all the opportunities that have not been exploited before.
For example, partnering with the PPP (Public-Private Partnership) Directorate at the Treasury to participate in the PPP projects. Our mandate gives us that, unlike the previous DFIs.
WHAT NEW OPPORTUNITIES ARE YOU LOOKING AT?
There are areas we have not exploited. We are, for example, thinking of clean renewable energy which has not been fully exploited and, so, we have targets set along that line in that sector.
The other area is post-harvest management which I am passionate about because we all see how much of our agricultural produce that’s going to waste during bumper harvest. The other opportunity is in the area of blue economy where we have a mass of waters which have not been quite exploited.
We are also looking at livestock value chain where we are looking at the end-to-end of entrepreneurs within that chain. We are looking at enhanced market linkages from improvement of production, veterinary services, hay production and all the way to animal products, including leather. These have not been in the strategies of these DFIs before.
AND YOU HAVE SET AN AMBITIOUS TARGET IN GROWING YOUR LOAN BOOK IN YOUR THREE-YEAR STRATEGIC PLAN TO 2024?
In our strategic plan, we want to grow our loan book from Sh4.5 billion to around Sh29 billion. We wanted to be ambitious. We didn’t want to have a conservative target. And so based on our assets, we said we should sweat these assets to project that kind of growth.
Definitely, there will be challenges on the way. One is the clean-up of the balance sheet. It takes a bit of time because of the processes that we require.
OVER THE YEARS, THE DEFUNCT DFIS HAVE STRUGGLED TO RECOVER LOANS. HOW ARE YOU DEALING WITH THAT CHALLENGE?
The bad book for the three organisations is in the range of Sh31 billion. However, the principal is Sh4.1 billion. Over the years, there has been accrual of penalties and interest. Since independence when, for example, ICDC was set up, it has been lending and making provisions for bad loans.
But it has never written off a single loan because of the process involved. What happens is that it keeps on accumulating the penalties and the interest.
WHY DID PENALTIES AND INTEREST ACCUMULATE TO THOSE LEVELS?
There’s a rule we call the principle of “in duplum” [where lenders should cease charging interest on defaulted loan once it surpasses the principal amount], which has not applied.
There are instances where the loan has actually trippled over the years or even 10 times more. Most of these loans as you see in the books, let’s say Sh100 million, was a loan of Sh50,000 in the 1960s.
So it was not right to leave it just like that. If the penalties and interest grow up to the principal amount, ideally you are supposed to stop (more charges) but it has not been done.
That’s part of the clean-up (of the balance sheet) that we are doing. It [the clean-up] is our priority because we want to attract investors and the first thing they look at is your books.
HOW DO YOU INTEND TO TAKE BAD LOANS OFF YOUR BALANCE SHEET?
We have to take the write-offs through the process of board and Treasury’s approval. We have put the batches of these non-performing loans into groups. For example, we have the ones in the 1960s, 1970s, 1980s and 1990s, and those taken thereafter. The next stage is to look for the securities of each one of those loans.
We want to see whether the securities provided can be monetised because there are some instances where they cannot be monetised like the ancestral land which you cannot even sell because it has been sub-divided over the years.
We are doing that clean-up as we hive these amounts off our balance sheet and put it under SPV [special purpose vehicle] that will be focusing only on the collections of that money.
WHAT WILL HAPPEN TO THE BAD LOANS YOU WRITE OFF?
When we write off the bad loans from our balance sheet, it doesn’t mean we will forget about them. We are looking at innovative ways of doing this. We are looking at the possibilities of getting organisations that do debt collections.
We have already talked to three firms which are good at debt collections. Secondly, there are organisations which buy the bad books and deal with it. Third, if it’s a company, we are putting together a team of experts within KDC that will do a turnaround strategy for those which can be salvaged.
I think it [debt recovery] can be done. It is only that we have never given it a full focus to say here is a bad book of this size that must be dealt with.
WHY ARE YOU PRIORITISING DEBT RECOVERY OF FACILITIES DATING AS BACK AS HALF A CENTURY?
It’s our priority because we want to attract investors and the first thing they look at is your books. So the best thing is to clean up your books so that you attract investors that want to work with you either through project financing or equity arrangement. This is a critical growth strategy for us.
HAVE YOU STARTED SENDING OUT DEMAND LETTERS TO DEFAULTERS?
Last December the firm sent out more than 100 demand letters to customers who have not appeared in our offices for the last four, five years for non-payment. We asked, “is there collateral?’ The answer was “yes”. Then I said, “keep six or seven auctioneers on the ready”. Pay or no pay, people started coming to the table.
When they came, we asked them to come up with repayment proposals based on their books. We discovered they are servicing other facilities in other institutions, but not KDC. Why? [Because there is] no pressure. They are only dealing with where there’s pressure.
We managed to get on a daily basis an average of three entrepreneurs coming before the deadline of the notice to propose their repayment plan ranging from Sh260,000 to Sh3.5 million per month. That’s how we dropped our non-performing book in three months from 78 percent to 71 percent.
WHAT ARE YOU CHANGING WHEN IT COMES TO LENDING?
We are changing the mindset of borrowers and lenders, who are our own staff. We want to have a mindset that this is a commercial entity as much as it’s a government entity. It has to make money for itself by serving the needs of the entrepreneur where banks and other financial institutions are not serving.
Yes, we are plugging in the [credit] gap, but we have to be prudent on how we run our borrowing and lending. We have reviewed our appraisal criteria. We are now following the five Cs: character, capacity, collateral, capital and conditions.
Most of our projects that failed, failed because of [lack of] character and independence. As long as you mix borrowing with a bit of lack of independence from influence which then kills your objectivity because somebody tells you lend there and you don’t follow due process, you will definitely fail.
